EU Leaders Try to Stave Off Bond Slump as Bank Talks Fail

Pedestrians walk past the European Union parliament building and the national flags of the member states, in Brussels. Photographer: Jock Fistick/Bloomberg

June 24 (Bloomberg) -- European Union leaders will this
week attempt to stave off a resurgence of market tremors
following a breakdown in talks on setting up unified banking
rules.

Euro-area bonds fell after negotiations among the 27-member
bloc’s finance ministers stalled over the weekend in Luxembourg.
They failed to agree on assigning losses at failing banks as
part of proposed rules on bank resolution and recovery. They
will regroup June 26, before EU leaders gather the next day for
a summit in Brussels.

“We shouldn’t be lulled by the current calm in the
markets,” German Finance Minister Wolfgang Schaeuble said in a
statement after the meeting. “Rather, we should quickly ensure
that we’re prepared for every eventuality.”

European leaders’ failure to forge ahead with a so-called
banking union that was agreed on almost a year ago has
underscored the frustrations in overcoming a crisis now in its
fourth year. With global markets jolted last week on concern
over the possible tapering of U.S. stimulus, euro-area leaders
who have relied on market calm over the past year may have less
leeway.

A potential snag also emerged in Greece, where one of
Antonis Samaras’s coalition partners abandoned the government
following a dispute over the closing of state broadcaster ERT,
narrowing the premier’s majority in parliament to three seats.

Yields Rise

The single currency was little changed today, slipping 0.1
percent to $1.3112 at 12:45 p.m. in Brussels. It fell 2 percent
last week. The yield on Spanish 10-year bonds, another yardstick
of euro-crisis market turmoil, briefly jumped above 5 percent
from the first time since April 2 before dipping back to 4.97
percent. Ten-year Italian yields rose 7 basis points to 4.69
percent.

The yield on Slovenia’s dollar-denominated securities
maturing in 2022 surged 22 basis points, or 0.22 percentage
points, to 7.093 percent at 11:31 a.m. in Ljubljana, according
to data compiled by Bloomberg, the highest level since debt sold
in October.

The banking-union talks collapsed early Saturday after 19
hours of negotiations on the question of which creditors face
writedowns when banks fail, compounded by differences between
euro-area countries and EU states outside the euro.

“There are still core issues outstanding,” Irish Finance
Minister Michael Noonan told reporters as he left the meeting.
“We have another meeting next week, and there’s no guarantee
it’ll reach a conclusion.”

Recapitalize Banks

The banking union’s primary objective was to allow bailout
funds to recapitalize banks directly rather than burdening
states with debt, thus ending the cycle of contagion between
banks and sovereign debt and offering a way out of the crisis.

French Finance Minister Pierre Moscovici said he had “no
doubt” that ministers will reach an agreement this week, while
Germany’s Schaeuble said a final deal must be constructed in a
way that won’t burden taxpayers.

“The banking-union concept is a credibility test,” Irish
Prime Minister Enda Kenny said at a European People’s Party
meeting in Vienna June 20. Not going forward “would be a poor
signal of both credibility and trust” of the EU, he said.

In Greece, the government was shaken as the Democratic
Left, the smaller of Samaras’s two coalition partners, withdrew
its ministers. The party had protested the prime minister’s
decision to shut the public broadcaster, suspend 2,600 jobs
there and create a new, smaller company.

Reduced Majority

The withdrawal leaves Samaras’s New Democracy party and the
Socialist Pasok to run the government. Together, they hold 153
seats in the 300-member parliament, compared with the 167 they
had when joined with the Democratic Left.

As Greece approaches its next aid disbursement from
international lenders in July, the EU has urged the indebted
nation to press ahead with its economic overhaul. The upheaval
revived concern that Greece will slide back into the political
turmoil that halted aid payments and raised the specter of the
nation exiting the 17-member euro.

“It would be very important to stabilize the political
situation in Greece now, immediately, and really concentrate all
energy on implementation of the program,” EU Economic and
Monetary Affairs Commissioner Olli Rehn said on June 21 in
Luxembourg. “I appeal to the sense of political responsibility
of all political leaders and the Greek people to ensure
stability and concentrate on policy rather than politics.”

Fed Comments

The European ructions come after markets around the world
tumbled last week in response to Fed Chairman Ben S. Bernanke’s
announcement that the central bank may start reducing bond
purchases that have fueled gains in markets globally.

The possible withdrawal of monetary support places the
burden of resolving the euro crisis back onto the shoulders of
European governments, according to Nicholas Spiro, managing
director of Spiro Sovereign Strategy in London.

“The ‘tapering terror’ that is convulsing financial
markets will throw the limited progress achieved in putting the
governance of the euro zone on a firmer footing into sharper
relief,” Spiro said in an e-mailed statement yesterday. “Euro-zone leaders can no longer count on market complacency to help
them muddle their way through the crisis.”